Market Insider

Jumping for Joy

October 20, 2016

Grain markets in the past week have seen a healthy bump thanks to weather concerns, strong indications of better demand, and, subsequently, short-covering in the futures markets as more traders are getting optimistic that we touched bottom. Corn is getting support from bigger ethanol production and continued decent export sales, while soybean export activities for the United States (U.S.) remain strong as there is not much competition until the South American crop comes off in early 2017. Wheat has had some aggressive short-covering taking place, but spreads continue to widen between feed and milling markets. Canola has been the highlight though, jumping on the delayed Canadian harvest and upside for palm oil prices.

Getting specific, pdqinfo.ca tells us that canola prices are up about 5.5 per cent week-over-week (or about 60 cents CAD per bushel) and almost 10 per cent in the past month. Futures movement have accounted for almost all of the move with basis relatively flat, but the best values are seen in 2Q2017, with average prices across Western Canada now sitting back above that $11 per bushel handle. Hard red spring wheat prices have also enjoyed strength with front-month contracts averaging almost 9 per cent higher in the past week to an average of $6.30 per bushel for the Canadian Prairies, thanks to futures up about a dime and basis narrowing by a nickel. Similarly, durum wheat has tracked similarly, up an average of almost 8.5 per cent for the week to above $8 per bushel. Pulses prices continue to inch up but lentils are acting the most impressive as higher-quality contracts are getting filled and some renewed Middle Eastern demand has put small red lentils above 30 cents per lbs and large green quality closer to the coveted 50 cents per lbs.

Ultimately, everyone in Western Canada has their eyes squarely on the Western Canadian harvest (or, rather, the standstill of it). Progress has been limited in the fields and either it continues to rain/snow or the fields remain too soft to get into them. This suggests more feed grain supply but is helping lifting prices for milling quality (as mentioned). This also includes oats though as futures prices are up over 20 per cent in the past month (technically that is just 40 cent USD per bushel and cash prices are back above or getting close to $3 bushel in many places across the Prairies. Simply put, with somewhere between 10 – 13 million tonnes potentially still unharvested, the market is taking notice. However, with each incremental move higher, the next percent point gain is harder to make (also known as the law of saturation – kind of like eating till you are full at Thanksgiving!).

Coming back to canola though (it is the hot topic right?) futures values in Winnipeg are back above $500 CAD/metric tonne, but the Canadian oilseed has some challenges it has to overcome to keep climbing. First, we’re starting to see basis levels for soybeans in the U.S. widen, as farmers selling off the combine are creating harvest pressures for the markets. Second, the futures boards for both Australian canola and Paris rapeseed have already started to pull back, meaning it will be harder for Winnipeg values to keep pushing higher without support from other exchanges. And finally, some warmer weather is finally allowing for some canola to finally get combined in Western Canada, but we are big believers of managing price AND profit risk and selling into strength. Locking in that next block of canola is a must today (if you have not done so already) and hard red spring wheat should be considered as well. We are not necessarily jumping for joy at these prices, but they are executable ones.